TACKLING THE TAX CODE EFFICIENT AND EQUITABLE WAYS TO RAISE REVENUE Edited by JAY SHAMBAUGH and RYAN NUNN Tackling the Tax Code Effi cient and Equitable Ways to Raise Revenue Edited by Jay Shambaugh and Ryan Nunn JANUARY 2020 ii Acknowledgments Th e Hamilton Project is grateful to the members of its Advisory Council for their valuable contributions, with special thanks to Roger C. Altman, Robert E. Rubin, Jason Furman, and Timothy F. Geithner for helpful discussion and insights. Th e contents of this volume and the individual chapters do not necessarily represent the views of individual Advisory Council members, nor do they necessarily represent the views of the institutions with which the chapters’ authors are affi liated. Th e chapters contained in this volume were greatly improved by the expert comments provided by participants at the October 2019 authors’ conferences held at the Brookings Institution. We are grateful to all who participated in those meetings. Th e editors wish to acknowledge the impressive contributions of the entire Hamilton Project staff . We are thankful to Kriston McIntosh for her advice on all aspects of production, as well as her thoughtful comments on many of the chapters. Emily Moss managed the book production process from beginning to end. Lauren Bauer and David Dreyer contributed substantially to the development of the book. Alexandra Contreras performed superb book layout and graphic design. Jana Parsons, Jimmy O’Donnell, and Christopher Robinson provided excellent research assistance. We are also grateful for the editorial contributions of Alison Hope, Karin Horler, and Siobhan Drummond, and for valuable input from Melanie Gilarsky, Stacy Anderson, Ahlim Lee, Pierina Hernandez, Vincent Pancini, Drew Burd, and Catherine Peng. Brianna Harden designed the cover. Th e policy proposals included in this volume are proposals from the authors. As emphasized in Th e Hamilton Project’s original strategy paper, the Project was designed in part to provide a forum for leading thinkers across the nation to put forward innovative and potentially important economic policy ideas that share the Project’s broad goals of promoting economic growth, broad- based participation in growth, and economic security. Th e authors are invited to express their own ideas in policy papers, whether or not the Project’s staff or Advisory Council agrees with the specifi c proposals. Th ese policy papers are off ered in that spirit. iii Table of Contents Foreword 1 Introduction 5 Emily Moss, Ryan Nunn, and Jay Shambaugh Th e Economics of Federal Tax Policy 9 Emily Moss, Ryan Nunn, and Jay Shambaugh Leveling the Playing Field between Inherited Income and Income from Work through an Inheritance Tax 43 Lily Batchelder Taxing Wealth 89 Greg Leiserson A Proposal to Tax Financial Transactions 149 Antonio Weiss and Laura Kawano Raising Revenue with a Progressive Value-Added Tax 191 William Gale Taxing Multinational Companies in the 21st Century 237 Kimberly Clausing How to Increase Growth While Raising Revenue: Reforming the Corporate Tax Code 285 Jason Furman Tax Reform for Progressivity: A Pragmatic Approach 317 Natasha Sarin, Lawrence Summers, and Joe Kupferberg About the Authors 353 iv 1 Foreword lexander Hamilton, for whom our project is named, was appointed ASecretary of the Treasury at age 34 by President George Washington. He carried with him into offi ce what biographer Ron Chernow called “a panoramic vision of a diversifi ed economy that would provide opportunity for people from all walks of life.”a Th e American War of Independence against Great Britain left us with crushing debts. On assuming offi ce, devising our nation’s fi rst tax system was among Hamilton’s most urgent and diffi cult assignments. Th is tax system funded the government and paid off the states’ Revolutionary War debts, which in turn gave our young, vulnerable nation a chance to prosper. Th anks to Hamilton’s foresight and political courage, America’s course toward bankruptcy was reversed, we established our creditworthiness, and a strong and successful nation was built. When Hamilton left his post fi ve years later, interest rates in the United States were as low as any in the world. Th is book is about taxes. It poses a simple question: Given that the United States needs more revenue, how should we raise it? Th e answers come from some of our nation’s foremost tax policy scholars and experts. Th e Hamilton Project commissioned them to come forward with proposals to address our government’s pressing need for revenue under the economic conditions that prevail today. Th e ideas in the chapters that follow focus on the central and most enduring questions about raising taxes—who pays them, what eff ects do they have on the economy, and how much revenue can they raise—questions that have animated our political discourse across three centuries. While every eff ort a. Chernow, Ron. 2006, April. Presentation at the Hamilton Project at the Brookings Institution, Washington, DC. 2 to raise taxes provokes opposition, principled and otherwise, our current economic circumstances demand we take up those questions again. Th ere are a number of reasons to consider sources for more revenue. First, we have immense fi scal imbalances in the United States. In June, the Congressional Budget Offi ce reported that “large budget defi cits over the next 30 years are projected to drive federal debt held by the public to unprecedented levels—from 78 percent of gross domestic product in 2019 to 144 percent by 2049.”b Even in today’s low interest rate environment, unsound fi scal conditions will at some unpredictable moment in the future constrain the ability of policymakers to address national challenges if the debt grows continuously and today’s mix of revenues and spending remains unchanged. Second, these imbalances are driven not by ambitious new spending programs but by previous health care and pension commitments as well as declines in federal revenues. As contributing author William Gal e of the Brookings Institution writes, “much of the projected increase in spending is due to rising net interest payments—burdens created by defi cits from previous years” (p. 198). To be clear, savings in government programs can be derived from thoughtful reforms, and federal budgets must refl ect the necessity of stabilizing our fi scal position in the years and decades to come. Th e yawning gap between spending and income is due in large part to reduced tax collections. As Larry Summers, former Secretary of the Treasury, and Jason Furman, former chairman of the President’s Council of Economic Advisors, wrote earlier this year, “the federal government [in 2018] took in revenue equivalent to just 16 percent of GDP, the lowest level in half a century, except for a few brief periods in the aft ermath of recessions. Without the Bush and Trump tax cuts (and the interest payments on the debt that went with them), last year’s federal budget would have come close to balancing.”c Th ird, we cannot get back on track to restore long-term economic growth, address growing economic inequality, provide aff ordable health care coverage, combat climate change, and much more without restoring the nation’s tax base. Simply put, we need additional revenues to pay for investments that will make our economy grow and enable more Americans to share in that growth. b. Congressional Budget Offi ce (CBO). 2019. Th e 2019 Long-Term Budget Outlook. Congressional Budget Offi ce, Washington, DC. c. Furman, Jason and Lawrence H. Summers. 2019, January 28. “Who’s Afraid of Budget Defi cits? How Washington Should End Its Debt Obsession,” Larry Summers (blog). 3 Fourth, most of these new revenues must come from those best able to pay, especially since tax cuts benefi ting the highest earners account for so much of the declining share of taxes paid at the federal level. Since the late 1960s, the share of federal revenue paid by working Americans in the form of payroll taxes has increased from just over 20 percent to 35 percent. Yet corporate tax collections have plummeted from more than 25 percent to less than 10 percent of revenues,d and the top rate paid by wealthy fi lers has fallen from 70 percent during Lyndon Johnson’s presidency to 37 percent today.e And over the last two decades, Congress has hollowed out the estate tax to such an extent that only 0.2 percent of estates pay any tax at all.f Th is has consequences beyond the bottom line. Th e tax system does far too little to address the concentration of income at the highest levels or fund investments that enhance economic and social mobility for workers and their families. In short, to stabilize our fi scal trajectory, whether to make our revenue system more progressive and growth-friendly or to fund new priorities, there is an urgent need to reconsider our current tax system. In the chapters that follow, we present our contributors’ new proposals for a value-added tax, a fi nancial transactions tax, wealth and inheritance taxes, fi xing the broken corporate and international tax systems, and giving the Internal Revenue Service the resources it needs to ensure that tax laws, both old and new, are better enforced and administered and to remove loopholes and unnecessary deductions and shelters. Overall, these proposals are carefully designed and built on the best available evidence and analysis. Each was subject to peer review, independently and in conferences, where we invited authorities in tax policy, economists, and others to exchange their views with the authors. We are grateful to all for contributing their expertise and making each proposal better. Tax policy is enormously complex.